Japan’s economy shrunk at a 6.3 per cent annual rate in the fourth quarter after last autumn’s rise in consumption tax, raising fears of a deeper slowdown and putting pressure on Shinzo Abe and the Bank of Japan to mount a policy response.
The contraction was far worse than the 3.7 per cent forecast by analysts, and similar to the slump after a previous consumption tax rise in 2014.
The dismal figures suggest that stimulus measures to cushion the effects of the tax rise were ineffective. With demand in Japan now suffering a fresh hit from the coronavirus outbreak, it points to a rocky economic outlook for the rest of the year.
“The sharp fall in output in the fourth quarter means that October’s sales tax hike hit the economy harder than most had been anticipating,” said Marcel Thieliant, senior Japan economist at Capital Economics in Singapore.
Japan’s Topix stock market barometer dropped more than 1 per cent after the release of the figures from the Cabinet Office on Monday morning.
Consumption, which fell at an annualised rate of 11 per cent, was the main cause of the fall in output, but business investment also fell at a 14 per cent pace.
There was no real bright spot in the data. Final sales of domestic product — which strips out inventory movements to give the best reading of underlying demand in the economy — fell at a 6.7 per cent rate.
Mr Abe had vowed to avoid a similar economic trauma caused by the 2014 rise in consumption tax with an elaborate set of offsetting stimulus measures, including a system of cashback points for spending in small retailers.
There were some signs that the measures had made shoppers less likely to bring demand forward to beat the tax rise, but it has still dealt a blow to consumers who have been struggling with low levels of real income growth.
After launching a large monetary stimulus in 2013, the Bank of Japan has become reluctant to ease monetary policy any further because it fears there will be negative side effects on the financial system.
It will now have to assess if there is any risk of a downward spiral in demand. Consumption by Chinese tourists has become important to Japan’s economy in recent years but tourism has all but ceased in the wake of the coronavirus outbreak.
Mr Abe’s government has already launched a fresh fiscal stimulus to take effect in 2020, offering some support to demand.
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